Employee Retention Credit
Clients are reaching out to us every week to ask questions about the ERC, so we thought it would be good to send this out so you have good information you can use to understand this complicated credit better.🤝
What is the Employee Retention Credit (“ECR”)?
The employee retention tax credit is a broad-based refundable tax credit that was designed to encourage employers to keep employees on their payroll. The credit may be available to employers who had employees from March 13, 2020 and through June 30, 2021.
For 2020, the credit can be worth up to 50% of qualified wages to employees, up to a maximum of $10,000 per employee for the year. For 2021 the credit can be worth up to 70% of qualified wages to employees, up to a maximum of $10,000 per employee per quarter.
How does a business qualify for the ERC?
The qualifications are super complicated – too detailed to explain in a letter like this, but there are three general rules to be aware of:
1. For 2020, if your gross receipts declined by 50% or more as compared to the same
quarter in 2019, then the business likely qualifies for the ERC;
2. For 2021, if your gross receipts declined by 20% or more as compared to the same
quarter in 2019, then the business likely qualifies for the ERC;
3. Lastly, many businesses that do not meet the above two gross receipts qualification
criteria find that they do qualify under the “Government Orders” criteria. This criteria is
quite complicated but essentially works like this:
a. Your business may qualify for ERC in 2020-2021 quarters in which certain
government orders negatively impacted your business and caused it to fully or
partially suspend operations.
For many Florida based businesses, it may appear at first glance that your business does not qualify under any of the three above criteria. Upon closer inspection, however, you may find that even if your gross receipts did not decline in 2020 or 2021 as compared to 2019, government orders in other states or even other countries did cause you to have partially
suspended operations as defined in IRS Revenue Notice 2021-20. So the Government Orders criteria is where many businesses are finding that they do indeed qualify for the ERC in one or more quarters in 2020 and 2021.
Does my business qualify for the ERC?
In order to determine if your business qualifies, first do some math. Were your gross receipts in 2020 and 2021 lower than the same quarter in 2019? If you find the answer is “Yes,” then compare that decline in gross receipts to the thresholds – 50% or more for 2020 and 20% or more for 2021. If you’re still a “Yes,” then it’s clear your business qualifies for at least one quarter and it is most likely in your best interest to claim the credit. If you’re a “No” under the gross receipts tests, then you still may qualify under the Government Orders criteria. Ask yourself these kinds of questions:
– Did a government order cause my business to be fully or partially shut down in 2020 or
– Did a government order cause my suppliers to be fully or partially shut down in 2020 or
2021 and did their shutdown negatively impact my business?
– Did a government order cause in another county/state/country create a negative impact
on the operations of my business?
If your answer to any of these is “Yes,” then you may qualify for the ERC for those affected
How do I claim the ERC?
Claiming the ERC is a far simpler process than the PPP was. To claim the ERC you only need to amend the Forms 941 (Federal Quarterly Payroll Tax Return) for the affected quarters and you claim the refund right there on the amended 941, called a 941X. Calculating the amount of the credit, however, is quite complicated. You have to factor in whether or not you received PPP1 and PPP2 and what wages were used to qualify the forgiveness of those loans. You also need to calculate what wages and employees qualify for the ERC in the affected quarters, and then have to calculate the maximum wages available for credit on an employee by employee and quarter by quarter basis. Due to the complexity of determining qualification criteria and the credit calculation, we find that clients do not apply for the credit themselves, but instead seek out an external consultant to do this for them. We’ll discuss that below.
What to beware of?
The old adage of “If it’s too good to be true, it probably is” is very appropriate for the ERC. This is especially true for Florida-based businesses because Florida was only under a government ordered mandate from March 19, 2020 – April 30, 2020. For most Florida-based businesses, eligibility under the Government Orders criteria would come from government orders from
other states or countries. We are hearing from clients that they are being bombarded by consulting companies claiming to help them maximize the ERC in exchange for a percentage (usually 10-25%) of the credit received. The ERC is one of the types of tax credits in which consulting companies are allowed by the IRS to charge a percentage of the tax returned to you in exchange for their services. So the structure of these engagements are permissible.
But what clients really need to beware of are the risks that YOU are taking when applying for
-YOU are the employer and YOU are applying for the ERC, not the consultant, therefore, YOU are taking all the risk of making sure you meet the qualification criteria and knowing that the credit has been calculated correctly and for the correct quarters of
2020 and 2021;
– It’s my belief that many of the consulting companies proffering their services do not have the history nor the experience to reliability provide this service to clients;
– The IRS has five years to audit the amended payroll tax returns on which you claim the ERC, and the wisdom in the CPA profession is that many, many of these amended payroll tax returns will be audited. So, you want to make 100% sure that what you are filing is accurate and correct;
– Most consultants agree to provide their services in exchange for a percentage of the refund when you receive it with no up-front fees or guaranteed fees. We like these kinds of contracts, but you also need to make sure that if the returns are audited, their contract also states that they will reimburse you for the fees they collected that are reversed on audit;
– You also need to do your due diligence on these firms and ask yourself if this firm will even be around in 2-3 years when the IRS audits the amended payroll tax returns. It is great to have the clause in the contract whereby the consultant refunds the percentage of the fees reversed on audit, but if that consulting company isn’t even in business 2-5 years from now, how will you get your fees back? You won’t and your business will be liable for 100% of the tax assessed by the IRS on audit, including what you paid to the consulting company. So you need to have 100% confidence in the consulting firm you
– The biggest risk you have, though, is the risk of applying for credits for which you don’t qualify. This is a tough one for the average business owner, because the rules are SO complicated it is really difficult to understand why you qualify for certain quarters and don’t qualify for other quarters. We’ve found many consulting companies doing absolutely lackluster diligence in determining which quarters clients qualify for. Their bias is to convince you that you qualify for all seven potential quarters because the ERC refund will be bigger and therefore their consulting fee as a percentage of this refund will be bigger. This is a huge risk for the business owner, however, because there is a high likelihood that the amended returns will get audited, and if reversed, the business owner is the one liable for repaying the tax, plus interest. Even worse, Rev Notice 2021- 20 imposes potential civil and even criminal penalties on wrongfully filed ERC claims. So, it is paramount that you, the business owner, fully understand (1) why you qualify for each quarter, and (2) how the credit is calculated for each quarter.
Is receipt of the ERC taxable to me?
This is a common question and unfortunately, we’ve found many consulting companies not being fully truthful in their answer to clients. Clients have told us that their consultants told them “the ERC isn’t taxable income to you.” Well, that’s not entirely true. The truth is this:
– The receipt of the credit is not taxable income.
– Upon receipt of the credit, business owners must amend the business income tax returns in which the qualifying wages were claimed and reduce their wage expense deduction in those periods.
– In simple terms, you must reduce your wage deduction by the amount of the credit received, and so your taxable income will go up by the amount of the reduced wage deduction.
– So, when it washes out, you are required to essentially pay tax on the credit received and you have to file amended returns in order to do that, which is going to cause you to incur professional fees to amend both your business and individual tax returns.
What is Tembo’s recommendation for me if I think I qualify?
We know that all the above information sounds complicated and even a bit scary. The reality is that Tembo is a big fan of the ERC and we believe many of our business clients are eligible to receive some amount of ERC and absolutely should apply for it.
That said, our firm is not an expert in ERC and we do not have the depth of expertise in this area in which to provide clients with the diligence needed to accurately file for the ERC. Instead, we’ve partnered with what we believe is the best tax credit consulting firm in the business to handle this complicated work for our clients – alliantgroup. We have a 15+ year history of working with alliantgroup (www.alliantgroup.com) on complicated tax credits. alliantgroup has been in business for 20+ years and has hired dozens of tax attorneys just to handle the ERC work that they are doing for their clients. They are not one of these fly-by-night consulting companies that were created solely to promote ERC work. They have an in-depth diligence process to make sure that business owners are only applying for the credits that they actually qualify for and reduce your risk of audit to the lowest extent possible. As part of their engagement, they assume the risk of audit and provide the required documentation to the IRS to not only justify the amount of the credit, but also justify the quarters in which a credit is claimed. I can’t emphasize the importance of this last part enough because this is the area in which I believe many, many clients are being led astray by lesser experienced consulting companies.
Our recommendation is as follows:
1. If you are a business that had employees in 2020 and/or 2021.
2. You want to determine if you might qualify for the ERC
3. Contact Steffanie Gunn at alliantgroup at [email protected] and setup a free conference call to discuss your potential eligibility. Make sure to tell Steffanie that you are a Tembo CPAs client because in addition to the benefits explained above, alliantgroup will also cover the preparation fees associated with filing the amended returns that are required after you receive the credit.
I hope you find all this information helpful. I think the ERC is a great opportunity for many businesses, but I’m fearful of the lack of diligence I’m seeing in some of the assessments that our clients’ have experienced so far. If you know me, you know I am an advocate for reducing tax in any and all legal ways and I do hope that if you choose to use a consultant other than alliantgroup you will heed the warnings provided to make sure that you have 100% confidence in your application for the ERC.